Budgets: I'm dreaming of .....

December 2, 2013

At the time of writing this blog, Christmas is a just a few weeks away. Everywhere you go it seems the strains of well known tunes such as “I’m dreaming of a white Christmas” invades the senses to the extent that everything else is blocked out. After a while we start to believe that we’ll have the Christmas promised in the songs – log fire, snowy landscape, everyone relaxed and happy, no pressure from work, and everything we need we have, debt free!
Of course the reality is often different. The log fire is replaced by a radiator (which is kept low due to the worry of the fuel bill), the kids are hyper and arguing, we’re worried about whether we’ll make this months sales targets, and all you got was a knitted jumper and a credit card bill that will take months to pay off.

Something similar happens during the budget process. Management become fixated on goals that ‘stretch’ the organization. (For more on my thoughts on this topic see my recent blog on Why stretch targets and budgets are incompatible). After a while we start to live the new budget in our minds, even though its content was the result of a guessing game and pressure from senior executives.
And as the new year starts, reality kicks in. The massive upturn in sales in month one of the new year doesn’t materialise and the savings you hoped to make when the budget was cut by 10% has not happened. Everyone blames each other and makes a new years promise not to make the same mistakes next year.

So what’s the solution? As with most things there is no one simple answer, but a start can be made by collecting forecasts that try and predict what will happen over the next 3 to 6 months. These must be based on reality – what do we really think sales will be and the costs that will be incurred. Forecasts should not be influenced by what the budget says or by the bonuses that have been promised. Where possible, forecasts should be backed up by facts such as detailing the current sales situations and what the costs cover. From this ‘reality check’, management can start a reasoned discussion based on fact as to what is driving the current level of performance and what should be done about it.
This then paves the way to a better budget process for next year that I’ve described in my recent blogs on budget maturity models.
For those wanting to know more about setting up a forecasting application, visit this link to Dynamic Forecasting; Extending the value of the budget.